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Questioning Geographic Luck

What really makes a nation rich or poor?

As any real estate agent knows, property value always comes down to location, location, location. In his popular book (and now PBS series) Guns, Germs, and Steel, University of California, Los Angeles, professor Jared Diamond takes that notion one step further, contending that what sepa-rates the haves and have-nots in our world is largely geographic luck; climate and access to natural resources and farmable animals are what matter most.

But MIT economics professor Daron Acemoglu begs to differ – and has eight years of research to back up his argument. Acemoglu doesn’t deny the historical importance of geography. “When you look around the globe, poor countries are concentrated around the equator,” he says, where climates are more hospitable to disease and land may be less fertile than elsewhere. But he maintains that geography is only part of the story and that a society prospers to the degree that it builds institutions that feature three key things: property rights, limits on the power of elites, and some equality of opportunity.

In 1998, when Acemoglu and colleagues looked at European colonization hundreds of years ago, they found that in countries like the United States and Australia, Europeans settled and built societies with institutional laws and regulations that protected property rights and limited the power of elites. These societies flourished politi-cally and economically. The opposite has been true for countries like Peru and the Congo, where the European colonists set up what Acemoglu calls “extractive institutions,” exploiting the large native populations, appropriating natural resources, and denying property rights or political power to the majority of the population. The fortunes of those countries have declined dramatically since the colonists’ arrival. While the climate and natural resources of all four countries have remained rela-tively constant, their institutions and the laws governing them changed as a result of European colonization, says Acemoglu. This, he says, indicates a direct link between reversals of fortune and institutions.

The American Economics Association recently cited Acemoglu’s work as “especially innovative” and awarded Acemoglu, 38, the 2005 John Bates Clark Medal, given every two years to an American economist under 40. The award also cited his contributions in macroeconomics and labor economics.

“We found ways to test [our ideas] with data, and we found data that -people hadn’t had before,” says Simon Johnson, PhD ‘89, an economist at the Sloan School of Management who collaborated with Acemoglu on the institutions work. The theory is controversial, the two say, because it challenges the popular view about the primacy of geographic factors. Acemoglu is now co-authoring a book on how a country can strengthen its weak institutions, showing how, as he puts it, “the burden of history is not forever a burden.”